THE DELTA PERSPECTIVE

Telecoms ICT business models:

Surviving the digital paradigm
Christophe Meunier - Partner

22 June 2016
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Telecoms ICT business

models: Surviving the
digital paradigm
Author:
Christophe Meunier - Partner

Overview
The ICT business models of the telecom operators and IT services
providers are about the get disrupted in the same fashion as how Over
the Top Technologies (OTT) are remodelling the consumer ecosystem.

The layering of the ecosystem will fundamentally change for the

existing players ability and means of monetising their investments. It
is critical for the operators to understand this shift to best define their
strategic positioning and comprehend the implications on their operating
model(s).

Indeed, the service delivery over a single unified network such as

Software-as-a-Service (SaaS) and Unified Communication (UC) are
creating a delineation between the services and the underlying
networks. This disrupts the traditional monetisation models of network
operators. In the past they relied on a tight coupling of services and
networks, monetising the network through the corresponding service.
This is no longer an option.

Therefore, it is critical for operators to reassess the intrinsic economics

of each layer of the ICT stack and redefine their role within the new
enterprise ICT mountain. They need to look at:

What are the economics and monetisation models for the

connectivity/ bandwidth layer?

How to enhance/ differentiate the connectivity with the mediation

layer through device management, security, analytics and cloud

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infrastructure(IaaS/PaaS)?

How to best participate in the service layer: UC, SaaS, IoT and what are the scale requirements?

If telecoms operators want to remain relevant in the new digital paradigm, it is urgent that they
consider the new business model requirements.

For example pure utility telcos vs. smart telcos. To survive, it is important that telecoms operators do
the following:

Utility telcos will need to run highly efficient networks at scale and structure the cost model to their
advantage

Smart telcos will also need to achieve utility economics and develop product and mediation
capabilities to mediate digital services over the network infrastructure. While a number of telcos
are aiming for the smart telco model, we see a great risk in achieving it without recognising the
need to achieve utility level cost-structure/ efficiencies. Only the operator building on a very efficient
platform will be able to truly become a smart telco

Digital service providers require an understanding of the scale requirements by selectively hand-
picking the services to provide (and those not to) and whom to partner with Given the strategic
positioning selected, operators will have to understand a number of areas to transform their
enterprise business in line with the new digital paradigm and create coherent business models
across its five dimensions:

Asset ownership

Channels

Service model & customer experience

Organisation & capabilities

Partnership ecosystem

Digital services adoption by enterprises: takeaways for telcos

The delivery of services over a single network is transforming the enterprise ICT ecosystem: Software-
as-a-Service (SaaS), Unified Communication and the Internet of Things (IoT) no longer need dedicated
networks that can be monetised through services

1. Cloud drives delineation of services from network

Cloud is built on abstracting the IT complexity and making on-premise infrastructure investments non-
economical. The tangible business benefits it enables will ensure its continued penetration.

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Exhibit 1: Cloud advantages

Source: IDC; Microsoft

The main implication of applications moving to the cloud is the delineation of services from network.
For a long time operators have been able to monetise their network investments through very specific
services. Vertically integrated ecosystems helped: cross-subsidies across networks, service and devices
remove some of the customers barrier to entry. PSTN networks are the best illustration, where voice
was the killer application. Given the separation between the service layer and the network, this
monetisation model is no longer an option.
Operators will now need to learn how to monetise the bandwidth connectivity independently from the
services running on top.

Exhibit 2: Service-network delineation

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2. New business models winning: case in point, voice via hosted UC

The global fixed voice market is estimated at about US$130 billion in 2015 and enterprise voice makes
up ~40% of that.
Enterprises now demand more than just a voice service. The need is for a unified communications
(UC) proposition that allows users to talk, share and interact across platforms as well as offer pricing
and delivering flexibility that scales with the business needs.
Some operators have built good UC propositions, but at an overall level they lag behind in the breadth
of services compared to the newer, more nimble players. A host of new players like 8x8 and RingCentral
are disrupting telecom operators traditional dominance in voice.

Exhibit 3: Hosted PBX & UC players in North American market (Source: Infonetics)

Hosted UC leaders have disrupted the market through business model innovation across multiple
dimensions:
Flexible pricing models: Pay per user under different models annual payment, monthly
payments (with contract), monthly payments (no contract); VAS priced separately
Scale through partnerships: Extensive partner network across access owners, system
integrators, VARs and other channel or connectivity players
Ease of integration: Integration with existing enterprise systems (ERP, CRM, ) for quick
implementation and lower complexity
Strong business case around savings: Guaranteeing ~50% lower costs versus traditional,
on-premise solutions
While disruption in the voice space will negatively impact voice revenues (and associated lucrative
margins) of operators, a broader and more important takeaway is the need to revamp traditional
business models. Offering a closed ecosystem of offerings will no longer be viable in the new open,
connected, digital paradigm.
All elements of the business (network, pricing, channels, service experience and partnerships) will need
to be rethought from scratch.
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3. Gaps in the IoT value chain present opportunity

The number of things connected to the internet is expected to grow exponentially from ~4 billion
devices today to 12-50 billion by 2020, based on various estimates.
This growth is expected to be fuelled by cheap smartphone devices, pervasive connectivity and
advancements in analytics. While most of the use cases today are in the consumer domain, future IoT
growth is expected to be mainly driven through use cases in the business domain (Industrial IoT).
Exhibit 4: IoT size & segments

Source: Citi; Vodafone; AT&T; Telefnica; Frost & Sullivan; M2M Now; Deutsche Telekom; Delta Partners analysis; Pyramid Research; ABI;
Berg Insight; Machina; IDATE

However, for IoT to cross the chasm from early adoption to pervasive use - especially in the business
segment - gaps in the IoT value chain need to be addressed. Gaps in interoperability standards appear
to be lessening with competing chipset suppliers, Intel & Qualcomm, among others coming together
under the Open Connectivity Foundation (OCF) and 3GPP standardising the Narrow-Band IoT (NB-IOT)
technology for IoT connectivity.
However, gaps still remain in enabling security, device management and aggregation. Supplementing
their central position as connectivity providers with network and partnership capabilities, telcos can
play a meaningful role in addressing these gaps.

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Exhibit 5: IoT value chain gaps addressable by telcos

In summary, the new digital paradigm offers both challenges as well as opportunities to telecom
operators. New business and delivery models are required to address enterprise needs and drive growth.

1. Telco business models to serve enterprise digital needs

Redefining the operators role within the enterprise ICT context requires answering three questions:
What is the new enterprise ICT stack, given the digital revolution?
Which areas of this stack should telcos focus on (business model)?
How to actualise required business model(s)?

I. The new enterprise ICT stack

If we assume that the services and the underlying connectivity will be procured and used differently,
it is easy to conclude that the new enterprise ICT framework will include, at the bottom, pervasive
bandwidth connectivity, and at the top, three types of services:
People to People: Unified Communication
People to Machine: Software as a Service (SaaS)
Machine to Machine: Internet of Things (IoT)
There is also an opportunity for a third enablement or mediation layer inbetween the connectivity
layer and the service layer. This layer should address the key adoption challenges:
Proliferation of devices
Security
Drawing insights from large streams of data
Scalable computing infrastructure & platforms
The enterprise stack would then evolve as shown below:

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Exhibit 6: The new enterprise ICT stack

II. Bifurcation of telcos enterprise business model

Taking this trend forward we believe two business models will emerge for telecom operators:

1. Utility telcos
Bandwidth utility players are typically alternative players with limited legacy that fully leverage technology
to deliver the most cost efficient service to their clients regardless of the reason for which the client
requires bandwidth. They typically run highly efficient networks (e.g., flat IP) and structure the cost
model to their advantage. For instance, Free in France backhauls the cellular traffic on LLU (Local Loop
Unbundling) using VDSL and ADSL. The utility operator typically runs a very lean cost structure, and
relies heavily on cost effective channels (e.g., online) and support (e.g., self-care, community based).
They also aim at keeping complexity as low as possible to increase the benefits of scale.
2. Smart telcos
The smart telco builds on the utility model. Its success relies on the ability to achieve also the same level
of economics as the utility operator. However, the smart telco is cognisant of the different bandwidth
requirements of clients. Consequently, the smart telco develops product and mediation capabilities
to enable/ mediate services over the network infrastructure. The smart telco is open and orchestrates
an ecosystem of service providers that can leverage the reach, the analytics and the infrastructure
capability of the operator (for a fee). While the smart telco has a direct and efficient route to market,
it also leverages the ecosystem of partners as a channel.
While a number of telcos are aiming for the smart utility model, we see a great risk in achieving it
without recognising the need to achieve utility level cost-structure/ efficiencies. Only the operator
building on a very efficient platform will be able to truly become a smart telco.

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Exhibit 7: Business models

Digital service specialists

Focus is placed on delivering services without owning or being tied to any supporting network
infrastructure. They rely on a direct relationship with the client, bypassing the operator. Because of the
lack of control over the supporting infrastructure, they typically offer best effort services adapting the
quality of the service to the available bandwidth (for example, adaptive bit rate). Already players such
as Ring Central are making significant in-roads with this model.

III. Emergent business model requirements

In order to successfully be a utility telco and eventually graduate to being a smart telco, operators will
have to transform their business model in a coherent way across all five business model dimensions.
In doing so, they should take inspiration from digital service providers who, being digital natives, offer
guidance on thriving in the new paradigm.

1. Asset ownership
Telecom operators need to create far more transparency in their internal asset allocation and reflect this
reality into their pricing. They need to understand the true asset costs of the bandwidth and optimise
and factor it into their pricing accordingly. On the flipside, given the low asset intensity of the service
layer in the new paradigm, the services should not receive asset cost allocation in a way that makes
them uncompetitive against the OTT/ asset light players. Re-thinking the asset model is therefore core
to ensuring the competitiveness and the sustainability of the business model.

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2. Channel
Telcos have developed channels that support the complexity of their current portfolio and are geared
to monetise services and bandwidth concurrently. This model is challenged on two fronts a. At
the service layer, by alternative channels with lower complexity and with no expectation of making a
margin on underlying bandwidth connectivity and b. On the bandwidth connectivity layer, by a utility
player with low complexity/ high volume.
Given that the operator of the future will be more open, orchestrating an ecosystem of partners,
operators will need to understand the distribution cost and effectiveness in order to be able to
remunerate a more open and alternative channel strategy.

3. Customer experience/ delivery model

Customer experience is poised for disruption. On one hand the digital era is enabling completely new/
more satisfying customer experience, giving back control to the customer, and raising the expectation
of instant gratification/ on demand bandwidth. On the other hand, the internet has also introduced
the concept of good enough to the telecommunication world.
The operator will need to rethink the overall customer experience, making sure they achieve the
minimum requirements and only differentiate on what the customer values and is willing to pay for.
For instance the SLA will need to be simplified to only address a limited set of performance levels that
reflect client expectations.

4. Organisation and capabilities

Moving from the current model to any of the three models described above will require different
skillsets and/ or right-sizing of the organisation to become lean and agile. The journey will depend
heavily on the target models that the operator wants to achieve. For instance, transforming to a utility
bandwidth provider will mean dramatically reducing the complexity and realising savings by right-sizing
the organisation. On the other hand, moving to the digital service provider model will require a very
different skillset and mind-set that the operators are lacking. Also, IT architecture and capabilities will
play a key role.

5. Partnership ecosystem
The typical operator approach to any problem has been to buy expensive equipment/ solutions from
vendors to own the platform delivering the product. This asset-intensive approach is no longer
sustainable in a highly competitive environment. The operator will need to learn to manage an
ecosystem of partners to complement their offering and deliver an improved customer experience.
Managing an ecosystem of partners is far more difficult than managing vendors. Digital players such as
Google and Apple have accumulated vast knowledge and experience at creating vibrant ecosystems.
Operators will need to do so too, adopting more open architecture, building control points and creating
win-win value propositions.

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Exhibit 8: Utility telco vs Smart telco business model requirements

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2. Business model evolution Conclusion

Telcos need to answer several questions before deciding on a game plan to play in the new enterprise
ICT stack. First, a clear understanding of the market dynamics across the different elements of the ICT stack
is critical to identify relevant participation areas. Deciding on the exact participation model will depend on
the starting point of the operator from both a network and enterprise capabilities perspective. It is required
to translate these guidelines into the specific changes needed for the business model elements (channel,
partnerships, etc.) and then to execute on the transformation mandate. The journey will of course differ
for local, regional and global operators.

Delta Partners have helped clients answer some of the key questions that are detailed below:
What/where are the relevant enterprise digital opportunities?
-- What digital opportunities make sense for the operator?
Short term vs. long term?
Global vs. regional opportunities?
-- Should the operator focus on enablement and/or play directly in the digital place?
-- What role should the operator play in enabling/ mediating the enterprise OTT?

How should the operator participate in the identified opportunity space?

-- Given the global nature of OTT plays (at least in the longer term), how should the operator
consider entering this space? Is organic play even an option?
-- What is the right participation model for the operator?
-- Is there a more financial play, where the operator acts as an enabling investor, taking to-be-
global players to the market?
-- How proactive should the operator be in pushing OTT play, balancing legacy revenue streams
with new revenue streams? Is it only a hook to protect telco revenues or is it a self-sustaining
revenue stream?

What business model/s best reconciles discrete objectives & the strategic
imperative?
-- What model best allows achievement of discrete objectives (e.g., cost take out) whilst still
enabling the overarching mid-to-long term strategy?
-- What does this mean across the various facets (e.g., asset ownership, channel, capabilities)
-- How does such a model reconcile traditional and digital services?
-- What are the implications/ risks for the existing business model?
In terms of monetization model (VAS vs. connectivity)?
Go-to-Market?
Acquisition strategy?

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How should the operator transition to the new model?

-- What should be the end-state blueprint?
-- What are the new skills and capabilities required? How can the operator close the capability
and organization gaps? How much to build vs. acquire?
-- What is a realistic transformation pace?
-- What are the main implementation risks and how should these be best managed?

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Based in our Johannesburg office in South Africa, Christophe is a Partner with over 15 years of consulting experience advising clients in
Europe, North America and Africa. His expertise covers the telecommunications and high-tech industries with a focus on enterprise ICT and
Cloud Computing. Christophe holds an MBA from the Massachusetts Institute of Technology in Cambridge, Massachusetts together with
a Master of Aerospace Engineer from Ecole Nationale Suprieure de lAronautique et de lEspace in France. He is fluent in English and
French.
If you would like to contact the author to further discuss this topic, you can email to
cme@deltapartnersgroup.com

Delta Partners is the leading Advisory and Investment firm specialised in Telecoms, Media and Digital with offices in the Middle East,
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